Moody’s downgrade of debt may force Detroit to pay $350 million to end swap agreements

Detroit had more than $2.5 billion of debt downgraded by Moody’s Investors Service as the city faces a deficit approaching $270 million. The move may force the city to pay $350 million over seven years to terminate swap agreements.

“Although efforts to stabilize the city’s finances and improve liquidity are ongoing and could be resolved over the very near term, protracted discussions continue and this uncertainty increases bondholder risks,” Moody’s said today in a report. The ratings remain on review for possible downgrade.

Gov. Rick Snyder has proposed placing Detroit’s finances under a nine-member advisory board to avoid a state takeover. Mayor Dave Bing rejected the plan and said he will offer a counterproposal that would preserve his authority.

“The downgrade announced by Moody’s today isn’t unexpected,” Chris Brown, Detroit’s COO, said in a statement. “In December, we narrowly averted a downgrade. Since then, we’ve been concerned about the continued possibility, and we’ve worked to avoid it.”

Michigan’s scrutiny “could result in bringing the city one step closer to bankruptcy,” according to Moody’s.

The ratings company cut $553.1 million of general obligation debt two levels, to B2 from Ba3. It reduced other debt backed by property taxes two levels, to B3 from B1, according to the report. The new ratings are five and six steps below investment grade, respectively.

Moody’s also cut to B2 from Ba3 about $1.47 billion of taxable certificates of participation from the Detroit Retirement Systems Funding Trust, according to the report.